Banker's Discount

A. Important Concepts - Banker's Discount

Assume that a merchant A purchases goods worth, say Rs.1000 from another merchant B at a credit of
say 4 months.

Then B prepares a bill called bill of exchange (also called Hundi). On receipts of goods, A gives an
agreement by signing on the bill allowing B to withdraw the money from A’s bank exactly after 4 months
of the date of the bill.

The date exactly after 4 months is known as nominally due date. Three more days (called grace days)
are added to this date to get a date known as legally due date.

The amount given on the bill is called the Face Value (F) which is Rs.1000 in this case.

Assume that B needs this money before the legally due date. He can approach a banker or broker who
pays him the money against the bill, but somewhat less than the face value. The banker deducts the
simple interest on the face value for the unexpired time. This deduction is known asBankers Discount
(BD). In another words, Bank Discount (BD) is the simple interest on the face value for the period from
the date on which the bill was discounted and the legally due date.

The present value is the amount which, if placed at a particular rate for a specified period will amount
to that sum of money at the end of the specified period. The interest on the present value is called
the True Discount (TD). If the banker deducts the true discount on the face value for the unexpired
time, he will not gain anything.

Banker’s Gain (BG) is the difference between banker’s discount and the true discount for the unexpired
time.

Note: When the date of bill is not given, grace days are not to be added.

B. Important Formulas - Banker's Discount

Let F = Face Value of the Bill, TD = True Discount, BD = Bankers Discount, BG = Banker’s Gain, R = Rate of
Interest, PW = True Present Worth and T = Time in Years

BD = Simple Interest on the face value of the bill for unexpired time = FTR100

PW = F1+T(R100)
TD = Simple Interest on the present value for unexpired time = PW × TR100=FTR100+(TR)

TD = BD ×100100+ TR

PW = F - TD

F = BD × TD(BD – TD)

BG = BD – TD = Simple Interest on TD = (TD)2PW

TD = PW × BG−−−−−−−−−√

TD = BG ×100TR

C. A Simple Example to understand the Basic Concepts of Banker's Discount

What is the present value, true discount, banker's discount and banker's gain on a bill of Rs.104500 due
in 9 months at 6% per annum?

F = Rs. 104500

T = 9 months = 912 years = 34 years

R = 6%

Banker's Discount, BD = FTR100=104500×34×6100=1045×34×6= Rs. 4702.50

Present value, PW = F1+T(R100)=1045001+(34)(6100)= Rs. 100000

True Discount, TD = PW × TR100=100000×34×6100=1000×34×6= Rs. 4500

Banker's Gain, BG = BD – TD = 4702.50 - 4500 = Rs.202.50